2022: The Diminishing Returns of Trickle-Down Rescue Policies and The Illusion of a Political Superhero

 

Democratic institutions act as a filter on public opinion, sifting out small costs and benefits that are spread among the population at large and focusing instead on concentrated costs and benefits that have large impacts on narrow interests. For this reason, democratic political institutions favor policies that impose small costs on most people, who are rationally ignorant about the policies, to finance large benefits to smaller groups—Randall G. Holcombe 

 

In this issue 

 

2022: The Diminishing Returns of Trickle-Down Rescue Policies and The Illusion of a Political Superhero 

I. K-Shaped Path: Surging Inequality 

II. Asset Bubbles as the Main Channel of Inequality; Pumping the PSE 

III. Asset Bubbles in Fixed Income Securities 

IV Asset Bubbles in the Property Sector, Trickle-Down Policies as Protective Moat for the Elites from Competition 

V. Media’s Conflict of Interest and the Overton Window; Unintended Consequences of Trickle-Down Effects 

VI. 2022 will Hallmark the Law of Diminishing Returns: Bonds and Peso Delineate Limits of the Trickle-Down Rescue Policies 

VII. 2022 National Elections: The Illusion of a Political Superhero 

 

2022: The Diminishing Returns of Trickle-Down Rescue Policies and The Illusion of a Political Superhero 

 

I. K-Shaped Path: Surging Inequality 

 

From GMANews December 31: Economic think tank IBON Foundation claimed that the Duterte administration’s policies this year helped the country’s richest recover faster from the COVID-19 pandemic.  “The majority of Filipinos grappled with joblessness, falling incomes, depleted savings, and high prices. On the other hand, the country’s wealthiest continued to prosper often with timely government support,” IBON said. The think tank said that the combined wealth of the 50 richest Filipinos recovered quickly and grew 30% in 2021 to $79.1 billion or roughly P4 trillion. “The Duterte administration supported big business through the pandemic,” IBON said. “Publicly-funded road, bridge and rail projects under its Build, Build, Build infrastructure program boosted the property values of tycoons’ real estate projects and increased traffic to their port terminals,” it added. 

 

Yep. A K-shaped economic path is in progress.  

  

The K-shaped path translates to flagrant divergences in the economic performances of different groups, which typically are ramifications of implemented policies. 

  

Specifically, applied to the recent recession, the redistributive bailout policies benefit the economic and political elites at the expense of the general economy.  

  

We shall fill the blanks of the left-leaning think tank group in elaborating this process.  

 

But before that, we start with a quote from a recent speech by the BSP chief: As of October 14, 2021, BSP has injected ₱2.3 trillion – approximately USD46 billion – into the Philippine financial system. This is equivalent to 12.8 percent of GDP.  

 

Why the need to inject such an unprecedented scale of liquidity? 

  

The Php 64 trillion answer: To combat credit deflation. 

  

Cui bono? 

  

The principal beneficiaries are the government, banks and non-financial corporations, and banks owned by the economic and financial elites, which constitute the biggest borrowers. 

  

And how? 

 

Through enacted policies benefiting the same agencies, particularly the BSP, the national government, the banking system, and the elite-owned Non-Financial Borrowers. 

  

Now in details. 

 

Through such massive injections, the BSP aimed at suppressing interest rates, which are at historic lows. 

  

This massive rescue package also included the unrivaled regulatory, operational, and capital relief measures and mandated lending to select sectors. 

  

The strategic goal was to have a loose monetary environment that facilitated credit rollovers and supported asset price inflation. The return of the animal spirits would then re-ignite bank credit-driven liquidity and normalize the financial system. 

 

The overall hope is that liquidity will be enough to solve mounting insolvencies.  

 

On this score, money printing or financial liquidity fixes everything. Or, if all you have is a hammer (printing press), everything looks like a nail (liquidity). 

 

 

Figure 1 

Bankers adored it, though. Perhaps, in testament to the immensity of the rescue efforts, the BSP chief was even named by the Banker’s, a magazine owned by the Financial Times, the "Global Central Banker of the Year 2022!"   

 

Why? Here is a guess. 

 

Among the emerging market central banks, the BSP was the most aggressive in embracing Quantitative Easing or asset purchases from March 2020 to March 2021!  (Figure 1 topmost pane)  

 

But the IMF Blog noted: "…while asset purchases could reduce tail risks, such policies could have unintended effects such as encouraging excessive risk-taking and eroding market discipline. And a more active role for the central bank in market-making could inhibit financial market development." (bold added) 

 

Congrats! The financial community loves monetary inflation and its consequent bubbles! 

 

II. Asset Bubbles as the Main Channel of Inequality; Pumping the PSE 

 

And yes, there are always unintended intertemporal consequences from redistributive policies.  

 

For instance, banks and financial institutions turned towards asset speculation to generate profits using the spare cash from the BSP and through increased leverage. (Figure 1, second to the highest pane) 

  

Yet, because of supposed credit deflation, bank "profits" came from the suppressed deposit expenses from repressed interest rates and the easing of loan loss provisions from the aggregate relief measures of the BSP.  Their speculative undertaking produced volatility in earnings.  

  

Recently, the financial sector accounted for part of the recent recovery of the banking system’s loan portfolio.  

 

The growth of intra-sector loans has essentially mirrored the thrust to the 7,500 level of the PSEi 30. (Figure 1, second to the lowest pane) 

 

The record growth of the BSP's assets has likewise anchored the PSEi 30. From this perspective, the BSP "owns" the current "uptrend" of the PSEi 30! (Figure 1, lowest window)  

 

Figure 2 

 

Also, the BSP has also tolerated the organized pumps to rescue or embellish the PSEi 30, as showcased this week in the attempt to defend the 7,000 level. (Figure 2, topmost pane) 

 

Ironically, the PSE was awarded the "best stock market" in Asia by a magazine for its ability "to create shareholder value." 

 

Organized pumps, which distort the pricing system, thereby affecting economic allocations and the coordination process in the real economy, are today worshipped as value creation! Amazing. 

 

But indeed, as the IMF warned, central bank liquidity measures encourage excessive risk-taking and erode market discipline! Such dynamics are in full display! 

 

From the March 2020 nadir through last Friday, the full market capitalization of the PSEi 30 jumped by Php 3.318 trillion!   

 

Another way to think of it is that share prices of the elite-owned firms were provided with a silver platter from the liquidity-induced bailout by the BSP of the financial system! 

 

Or, part of the wealth cited by the left-leaning think tank comes from the bloated share prices of firms owned by the elites.  

 

In particular, the top 10 wealthiest families in the Philippines own and control the twenty-eight of the elite members of the PSEi 30. 

 

Including Security Bank and Wilcon Depot, all the elite firms of the benchmark index are owned and controlled by some of the 50 wealthiest families here. 

 

And so, pumping the PSEi 30 benefits the elite most directly. Because of such asset inflation, the local elites enlist as part of the world's wealthiest.  

 

The moral: Having one’s firm listed on the PSE, or much better, included in the PSEi 30, is a ticket to the prestigious club of wealthiest. 

 

And the BSP may be an invisible ally in supporting one’s membership. 

 

Nonetheless, the PSE’s PER remains at lofty pre-Asian high levels as of November! (Figure 2, middle window) 

 

III. Asset Bubbles in Fixed Income Securities 

 

And the asset inflation does not stop at the PSE. 

 

As of September 2021, twenty-nine of the 30 biggest bond issuers, constituting about 89% of the domestic issuance, are either listed companies or subsidiaries of one. Data from Asianbondsonline.org (Figure 2, lowest pane) 

 

That is to say, aside from the issuers, the BSP’s rescue, which dropped down policy rates (pushed up prices) to historic lows, benefited the holders of these bonds (which are the private and public financial industry)!  

  

Figure 3 

 

And for the BSP to inject liquidity, the national government had to issue bonds or expand its outstanding debt stock. And the BSP bought these directly and through the banks. (Figure 3, upmost pane) 

 

So the record increase in debt, rationalized by record public spending (Build, build, build), sent fiscal deficits rocketed anew to record levels (as of November). (Figure 3, middle and lowest window) 

 

The point is, credit financed record public spending by the BSP and the financial sector substituted the so-called bank credit deflation. 

 

The BSP made sure that deflation in the aggregate never transpired.  

  

It is interesting to know that while banks declared a contraction in credit expansion in most of 2020 to 2021, non-financial firms of the PSEi 30 continued to expand credit, primarily from banks.  

 

So it is not clear which data, published by banks or firms of the PSE, are facts. 

 

IV. Asset Bubbles in the Property Sector, Trickle-Down Policies as Protective Moat for the Elites from Competition 

 

Of course, collateral values anchor the assets of the banking system. Once deflation engulfs the asset markets, banks will suffer immensely. So, the rescue of the banking system by the BSP and the asset markets also included the real estate markets, the biggest clients of banks. 

 

 

Figure 4 

 The bounce of monetary liquidity, popularly benchmarked by the M3, has likewise coincided with the BSP’s real estate index in Q3. (Figure 4, upmost pane) 

 

Curiously, there seems to be a substantial departure in the BSP’s NCR data compared with the NCR (Makati) data of the Bank for the International Settlements (BIS). (Figure 4, second to the highest window) 

 

And it is not just the BIS. The property sales and revenues of the biggest property developers in Q3 barely supported the BSP data. (Figure 4, second to the lowest pane) 

 

It is no surprise that the biggest property developers are likewise firms owned by the economic elites. 

 

In essence, the interests of the BSP and the National Government, the elite-owned and controlled banks, and the non-financial firms owned by elites are interdependent or intertwined. These parties constitute the troika. 

 

And this relationship has been no secret, even the quondam BSP chief Amando Tetangco Jr. openly espoused of the trickle-down effect: “We face a parallel challenge as central bankers. How do we enable a greater trickle-down effect so that opportunities and benefits of a healthy and growing economy are cascaded to the grassroots?” 

 

Amando M Tetangco, Jr: Tapping into our strengths - opportunities, threats and challenges for 2016 and beyond in the Philippines and Asia, BIS March 18, 2016 

 

The trickle-down, according to Collins dictionary, is the theory that benefits given to people at the top of a system will eventually be passed on to people lower down the system.  

 

Said differently, policies benefiting the elites are expected to diffuse eventually to the general economy.  

  

So instead of promoting entrepreneurship and competition through a market economy, entrenched economic and financial policies essentially advance the interests of the elites through subtle protectionism. 

 

For instance, many elite owned companies, which have the undue advantage of access to cheap formal credit, expand by gobbling up competitors through acquisitions. This has resulted in reducing competition and magnifying economic concentration. 

 

See my treatise on the critical shift in Jollibee’s business model in March 2019. 

 

Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy, March 3, 2019 

 

Still, some quarters are so incredibly obsessed with the GDP. But they neglect the reality that many Filipinos continue to look for greener pasture overseas! They never seem to ask why?  If the real economy is doing well, then adequate jobs and income growth should reduce the incentive of the locals to go abroad, right?  

 

See the logical contradiction?  

  

Instead, they turn the table and shift the rhetoric that OFWs are heroes, discounting the social cost of separation from families. For them, everything is reduced to statistics (reductio ad absurdum). 

 

The mainstream does not seem to understand that the economy represents a complex interdependent structure of production and the provision of goods and services by entrepreneurs that are valued and paid for by consumers. The idea that the economy is all about money and spending is called the money illusion. The GDP can rise from mere increases in money supply growth! 

 

But not all news is bad news.  

 

The recent amendment of the retail act, which reduced investment barriers for foreign investors in the retail industry, should be a pleasant development. But this is minor compared to the walls of regulations and being erected piggybacking on the existing ones in the name of protecting consumers, health, and other political platitudes, as well as the coming taxes to pay for the public spending extravagance.  

 

The liberalization of the retail industry in 2000 spurred a boom. It is a shining example of how economic freedom can deliver growth. But sadly, because it is one of the few industries opened to the public, it also became a magnet of credit bubbles. 

 

V. Media’s Conflict of Interest and the Overton Window; Unintended Consequences of Trickle-Down Effects 

  

The troika also controls the Overton Window, the permissible window of discussions through media.  

 

From this view, all the present defects signify technical rather than systemic. 

 

So media fixates on commentaries, analysis, and forecasts by the establishment entities (their advertisers) moored on government statistics.  

 

Pin-the-tail-on-the-donkey projections merely reinforce or justify the validity of government constructed and maintained statistics. Such signify as the PR effects through the confirmation bias. The integrity of data seems of no concern to the public.  

 

Yes, the incumbent administration has attempted to reconfigure the system by centralization.  

 

However, it lacked the necessary means and political/legal support to undertake nationalizations. And so, it devoted much of its activities to outsourcing its projects primarily through Public-Private Partnerships (PPP). Nevertheless, as evidence of this transformation, public spending to GDP is at an all-time high! 

 

This is the relationship cited by the think tank. 

 

Pandemic policies further aggravated this centralization process. 

 

In any case, the outcome of this process has been a massive increase in leveraging.  

 

System leverage (or bank credit plus public debt) has hit a Php 21 trillion or about 110% of the estimated GDP (as of November)! Excluded from this data are the private bond markets and the shadow banks or the informal credit sector. (Figure 4, lowest pane) 

 

Importantly, the push towards centralization translates to the magnification of concentration risks. Or, a few industries have corralled the economic resources and credit. 

 

Of course, the mainstream believes in cost-free actions. So, they think that fixing market prices, imposing arbitrary coercive and redistributive policies, and embellishing economic or financial statistics only have benefits.  

 

For them, short-term gratification is more important than the long-term process. 

 

VI. 2022 will Hallmark the Law of Diminishing Returns: Bonds and Peso Delineate Limits of the Trickle-Down Rescue Policies 

 

Unfortunately, the bond and peso markets appear to be saying otherwise, which probably means that the law of diminishing returns has started to erode on the initial benefits from the present rescue policies. 

 

 

Figure 5 

The government’s statistical inflation plunged to 3.6% in December. Though the BSP-controlled T-bills rates fell in response, bond yields increased, particularly in the belly of the curve. 

 

Again, institutional treasury traders have parted ways from their analysts. 

 

Bond yield (20-5 year) spreads continue to suggest that a substantial drain in liquidity could be in progress. (Figure 5, upmost window) 

 

And as proof, Php 300 billion of direct loans from the BSP to the National Government will be extended this month. 

 

The falling peso appears to corroborate this signal. If so, this should adversely affect the economy and the markets soon, covid or no covid surge. (Figure 5 middle pane) 

 

Mounting USD shorts are about to bring the USD Php past its 2005 highs reinforcing its long-term trend. The 51-year old uptrend of USD Php remains intact. (Figure 5, lowest pane)  

 

Figure 6 

Mainstream experts barely explain the connection of asset inflation with the CPI through money supply.  

 

Instead, they allege that high prices are merely a function of supply disruption, hence "transitory". Focusing on this provides the convenient pretext that a vaccine reopening will fix supply issues and drive growth. 

 

In this context, however, falling CPI is a function of weakening demand. The PSEi 30 likewise has echoed this relationship. (Figure 6, upper pane) 

 

But neither will the vaccine nor reopening erase the embedded economic and financial sins.  

 

And so, the establishment’s recourse to inflate asset prices to restore the "animal spirits" in the hope of revitalizing demand from the trickle-down policies. 

 

Despite the GDP boom and optimistic projections, the BSP remains adamantly reluctant to exit from its easy-money policies.   

 

From the Businessworld, January 7: "Given the nascent economic recovery, the priority for the BSP is to ensure the sustainability of the recovery and prevent long-term scarring effects,” Mr. Diokno said at an online briefing on Thursday. “We would like to emphasize that the timing of the exit remains very much uncertain at this time. The threat of further coronavirus disease 2019 (COVID-19) infections continues to pose a downside risk to both growth and inflation in the coming months,” he added. " 

 

The convenient excuse is a resurgent Covid. Really?  

 

And there is more. 

 

The mainstream barely seems to grasp that falling statistical inflation amidst rising yields signals that the window of subsidies to the same privileged political-economic group via the inflation tax could close. (Figure 6, lower window) 

 

Financial markets appear to be delineating the limits of the rescue and redistributive policies of the BSP and the national government. 

 

And similar financial market dynamics abroad may also exacerbate current conditions. 

 

This should be the story of 2022. 

 

VII. 2022 National Elections: The Illusion of a Political Superhero 

 

Last November, the incumbent Finance Secretary predicted that four concerns, namely, debt, inflation, inequality, and climate change, signify the challenges the next administration is bound to face. From the Inquirer, November 25: The third challenge, according to Dominguez, was that “we need to manage the inequalities exacerbated by the COVID-19 pandemic — both within the country and among countries.” 

 

The new leadership in the coming elections will barely alter the fundamental political-economic structure. 

  

The incumbent just proved it. 

  

While changes did occur at the margins, even the incumbent’s thrust to promote neo-socialism failed to dismantle or substantially reorganize the current system into his preferred mode.  

   

Changes from the new leadership will only affect some segments of the economy.  

 

And just look at how the DoF chief treats the interconnected as independent forces, excluding the issue of climate change. It provides a clue of the direction of policies. 

  

And given the penchant for central planning, the market economy will likely be sacrificed at the altar of populism. No matter who it is, the policy difference provided by the new leadership should be a minor degree.  

  

With surging debt levels, expect taxes, direct and indirect, to rocket post-elections. 

  

The policy chickens will come home to roost via stagflation. 

  

Elections signify no less than personality-based politics—the illusion of a society led by an all-knowing political superhero. 

 

Only a financial crisis may spur an epiphany. And because unsustainable imbalances continue to accumulate from recent attempts to reduce tail risk, it is coming. Soon. 

 

Yours in liberty, 

 

The Prudent Investor Newsletters 

 

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Notice:  This newsletter is intended to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice.  The contents of the newsletter are not expressed solicitation to trade and that the positioning on particular issues discussed merely reflect the opinions of the writer.